Advisers are cautious on two real estate IPOs

The offerings may be too complicated for investors, they say

May 3, 2009 @ 12:01 am

By David Hoffman

Financial advisers are leery of an initial public offering of two new exchange traded trusts — which give retail investors easy access to residential real estate — that ends tomorrow.

The MacroShares Major Metro Housing Up (UMM) and Macro-Shares Major Metro Down (DMM), developed by MacroMarkets LLC of Madison, N.J., are too complicated for most investors, according to some advisers.

MacroShares are similar to exchange traded funds but must be issued in pairs.

An “up” MacroShare will invest in Treasuries and enter into multiple forward contracts and a swap agreement with its paired “down” Macro-Share.

The result is a constant shifting of Treasuries back and forth be-tween the two in an attempt to mimic the percentage changes in an underlying benchmark.

The two trusts are designed to track the change in U.S. home prices as measured by the S&P/Case-Shiller Composite of 10 Home Price Index. The paired securities will have a five-and-a-half-year term and will feature a 300% leverage factor.

But that is just too much for most investors to comprehend, said Mark Balasa, a financial adviser and co-president of Balasa Dinverno & Foltz LLC of Itasca, Ill., which manages $1.5 billion in assets.

And if the market has taught investors anything, it is that they shouldn't invest in things they don't understand, he said.

Nevertheless, the two IPOs are widely expected to be a success.

Demand is expected to be so great that MacroMarkets said April 20 that it was doubling the number of shares being offered during the IPO to 20 million shares of UMM and 20 million shares of DMM for a total offering size of $1 billion.

ELECTRONIC AUCTION

The initial offerings of the trusts will occur simultaneously via an electronic-auction process managed by WR Hambrecht + Co. of San Francisco.

After the IPO, the trusts will be listed on the NYSE Arca exchange May 11.

“U.S. residential real estate is the largest unsecuritized asset class in the world,” said Sam Masucci, president and chief executive of MarcoMarkets. “MacroShares Major Metro Housing will open up this large and important asset class to the global investor community.”

Despite their complicated structure, the trusts may be the best vehicles for the job, said Paul Justice, an ETF strategist with Morningstar Inc. of Chicago, because it would be impossible to “own” the Standard & Poor's/Case-Shiller index.

The best way to mimic the movements of such an index is to replicate it synthetically, and Macro-Shares provide a way to do that, he said.

Exchange traded notes provide another way.

But ETNs are debt securities backed only by the credit of the issuer. During a time when investors have seen the collapse of ETN issuers such as The Bear Stearns Cos. Inc. and Lehman Brothers Holdings Inc., ETNs seem particularly flawed, Mr. Justice said.

MacroMarkets, however, has tried its hand at MacroShares be-fore, with mixed results.

With Claymore Securities Inc. of Lisle, Ill., acting as marketing agent, the firm launched the MacroShares Oil Up trust and the MacroShares Oil Down trust in November 2006.

The partnership was dissolved, however, in November 2007.

Industry experts have speculated that the split had to do with the fact that MacroShares surprised almost everyone by trading at wide discounts and premiums to net asset value — something few investors thought would happen.

The MacroShares stopped trading in April 2008 because oil prices rose to the point of triggering a built-in “early-termination event” within the trusts.

They were replaced by the Macro-Shares $100 Oil Up (OUY) and MacroShares Oil Down (DOY) in July.

This time around, MacroMarkets has teamed up with WisdomTree Asset Management Inc. of New York to help it market its housing Macro-Shares.

At least one adviser doesn't think MarcoMarkets' past troubles mean that it will have problems with the new housing MacroShares.

“The new real estate funds might fare better because there are few alternatives for investors who want exposure to the residential-housing market,” said Tom Lydon, president of Global Trends Investments. The Newport Beach, Calif.-based firm manages $75 million in assets.

E-mail David Hoffman at -dhoffman@investmentnews.com.

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